Ten years of data charts a path from the depths of recession to a renewed slump
With the second-steepest fall in output in a decade (since the 2009 depths of the global financial crisis), the UK economy slipped into contraction in June, according to IHS Markit/CIPS data.
On the brink of Brexit, the depressed economy was analysed via the CIPS/IHS Markit Purchasing Managers’ Index (PMI), lead indicators for the economy, and specific influencing factors. The figures reflect purchasing managers’ expectations of future economic activity, based on monthly surveys in construction, manufacturing and services.
According to IHS Markit, the last economic dive of this level was immediately after the 2016 referendum. Although employment has continued to rise, the resulting decline in productivity was the largest in the survey’s history. The speed of this year’s drop in manufacturing was last seen in 2012, and for construction it was even sharper – the steepest since April 2009.
Three major events in the past decade have heavily impacted the UK economy, says John Glen, CIPS economist and professor of economics at Cranfield School of Management. The first was the general malaise due to the recovery from the financial crisis, which lasted until the end of 2012; then came the Osborne/Cameron expansion of 2013-2015, which focused on tax cuts, expansion of bank lending and support for the UK housing market, resulting in a consumer-led boom in the economy. Thirdly, Glen cites the post-2015 election period, when Brexit introduced significant uncertainty into the economy, especially after the June 2016 referendum.
“Brexit and uncertainty associated with it has been responsible for the UK economy’s stagnation,” says Glen. “Businesses have stopped investing and consumers have stopped spending. The EU is slowing down due to Brexit, and there is less global growth.”
In construction, commercial building remains hardest hit by uncertainty, with last month showing the steepest fall in this activity since September 2017. Housebuilding is the only sub-category of construction to buck the downward trend, but growth remains softer than average. Stats also revealed the sharpest drop in construction employment for six and a half years. “Fundamentally we need to build a lot more houses,” Glen adds, “so economic recovery and a more efficient planning system and regulation will help housing recovery.”
The manufacturing sector showed further signs of contraction, as the total volume of new business fell for the first time in seven months. The rate of contraction was the greatest since July 2016 and one of the fastest seen over the past six and a half years. Manufacturers reported increased difficulties in convincing clients to commit to new contracts in May. IHS Markit analysts and Glen agree that this mainly reflected the already high level of inventories following stockpiling activity in advance of the original Brexit date of 29 March.
“Prior to March there was an increase in output as organisations built inventory,” says Glen. “After the Brexit non-event, organisations are holding too much stock, so they are not placing orders and demand has fallen. There may be a lesser stockpiling effect prior to the end of October as current stocks are unwound and businesses look to build stocks up again in case Brexit happens.”
In spite of this, manufacturers were optimistic in May. Almost 49% expect output to be higher in 12 months, compared to 7% forecasting contraction. Optimism was attributed to reduced uncertainty following Brexit, growth plans, recoveries in domestic and overseas demand, new product launches and the use of new technologies.
Services, which account for over 80% of the economy, experienced a peak in 2014 thanks to government expansion, which created confidence, says Glen.
Since then, a recovery in service sector output has been supported by a modest rebound in new business and the fastest upturn in staffing levels since November 2018. Respondents commented on greater intakes of new work and a “slight improvement” in underlying business conditions.